Question

Flin Flon Constructino Company is under contract to build a commercial building at a price of $4.2 million. Construction begins in January 2006 and finishes in December 2008. Total estimated construction costs are $2.8 million. Actual construction costs incurred in each year are as follows: in 2006, $560,000; in 2007, $1,800,000; and in 2008, $440,000. Calculate the revenue and gross profit to e recognized in each year, using the percentage-of-completion method.​

Answer 1

In 2006, the revenue recognized is $840,000 with a gross profit of $280,000.

In 2007, the revenue recognized is $2,700,000 with a gross profit of $900,000.

Step-by-step explanation:

To calculate the revenue and gross profit to be recognized in each year using the percentage-of-completion method, we need to determine the percentage of completion for each year based on the total estimated construction costs.

1. Calculate the total estimated construction costs for the project: $2.8 million.
2. Determine the percentage of completion for each year by dividing the actual construction costs incurred in each year by the total estimated construction costs.
3. Calculate the revenue and gross profit to be recognized in each year by multiplying the percentage of completion for that year by the contract price of $4.2 million.

In 2006, the percentage of completion is $560,000 / $2.8 million = 0.2 or 20%.

Therefore, the revenue recognized in 2006 is 20% of $4.2 million = $840,000, and the gross profit is $840,000 - $560,000 = $280,000.

In 2007, the percentage of completion is $1,800,000 / $2.8 million = 0.6429 or 64.29%.

Therefore, the revenue recognized in 2007 is 64.29% of $4.2 million = $2,700,000, and the gross profit is $2,700,000 - $1,800,000 = $900,000.

In 2008, the percentage of completion is $440,000 / $2.8 million

= 0.1571 or 15.71%.

Therefore, the revenue recognized in 2008 is 15.71% of $4.2 million = $659,220, and the gross profit is $659,220 - $440,000 = $219,220.